Bird

I wouldn't typically terminate a plan before the end of the year if the company wanted to make a contribution for that year, or else, as Bill Presson notes, you do something to waive last day requirements or whatever. Depends on what you want to happen I guess. mutatis mutandis to you too.

Appleby's comments are correct. But on a practical level, this is unfixable - the costs are so open-ended it is ridiculous (penalties, fees, contributions to be made for others who weren't informed). If it's me, I explain the correct way to fix it, and then informally note that maybe it was never a legit plan at all due to all of the failures involved, and that he could either ignore everything and eventually take the money out as a taxable distribution (even though no deduction was ever taken), or take it out now as an excess contribution and pay the 6% per year excise tax. Just make it abundantly clear that the broker is the one who screwed up, and that you're not giving formal advice. Just minimize your efforts and distance yourself from the mess.

In a hyper-technical sense, he is supposed to be able to have documentation either back to the last individual favorable determination letter issued to his own plan, or all the way back if he was using prototypes. In practicality, the IRS won't go back more than the current document and the last restatement, so he is ok. I commend him for his diligence but it is way, way way over the top.

Just taking a stab at this without looking it up or thinking too hard...I think what you have, essentially, is an overcontribution. I think the rules for a SIMPLE would be the same as a regular IRA, i.e. you can take it out before April 15 without penalty. After April 15, there is a 6% (??) penalty. So that's where he is now, and 6% per year thereafter. That beats having the whole thing taxed. The other stuff about not enrolling employees is a different matter. Just trying to get the ball rolling and see if anyone corrects me or otherwise picks it up.

In theory you're right but I would rather leave things wrong and explain it later than give them another $2K and try to get the first one back out of the bowels of the EFTPS system. We've accidentally mis-paid and/or mis-reported and been able to respond to their inquiries and sort it out. The lesson learned, of course, is to take extra, extra care to do it right the first time. Not that I'm blaming the original poster; of course someone else went rogue here. Having said that, if you take the position that anything that goes wrong is your fault, you develop a sixth sense for heading things off at the pass.

It sounds like the plan is not held at a recordkeeper, is that correct? Either a pooled plan or self-directed brokerage or similar? I think the trick is to "un-do" the payroll aspect of this, either by physically returning it, or maybe leave it alone and take a different $8000 that would have gone through p/r and just taking it directly. Yeah it shouldn't have gone through the company but it's essentially a PT that is pretty much immediately corrected. Assuming/hoping that the EFTPS processing was done under the plan's number. If not, the easiest way out is to file the 1099 under the number it was paid and hope for the best. I don't know how to get that money re-assigned.

Thanks for correcting me. At this point in my life, if it comes up in the next couple of weeks I might remember it, otherwise I will revert to my old belief. Sigh.

I didn't follow the link but I think that New Jersey thinks that if you deferred income while a NJ resident, you are supposed to pay tax to NJ on the income no matter where it is received. That is widely - universally - ignored.

So tax policy is that it's ok to retroactively make an election for the first year, but after that you must do it before the end of the year. What sense does that make? And why should sole proprietors get a break like that? I'm not arguing with you, just posing rhetorical questions. (The answers are - someone asked for it, and Congress is too busy looking for donations to understand any of this stuff, and they said yes.)

Thanks Peter. That makes it even more curious, as far as tax policy goes.

Being not fully tuned in to "new" developments, I should have commented that sole proprietors can now set up a 401(k) retroactively, so apparently there is not really any concern about making retroactive elections, at least for sole props. How this is good tax policy I don't know, but I digress.

We treat these plans like any other - use our document, collect data, prepare a val, with or without tax return as needed. Yes there are some shortcuts - maybe a simple phone call to collect data, confirming no employees and income. We charge less than for a "regular" plan. But sometimes they are a timesuck because these are often people who think you can read their mind and can't be bothered to answer your data collection request. In theory, no "admin" is needed - just a simple doc and have the accountant calc the contribution and put it in, right? But we've seen accountants who think you can pay a salary of $100K to an S corp owner and max out (dollarwise) on contributions. And accountants who use their own software and don't know how 401(k) contributions work vs. profit sharing. Or we see here on the board where someone has been making Roth contributions and now wants to take a distribution but the money is all commingled and no one has been tracking it separately.

Yeah, honestly I've never seen the funding or reporting tied to Jan 31, the due date for the W-2. That's misleading at best. I still take the position that contributions should be determined by Dec 31 (for a self-employed person*, that means having a form on file, for a corporation, that means having a form on file and having the money withheld from a paycheck). Actual deposit deadlines are a different matter; for self-employeds, it boils down to the due date of the return, for a corporation, it goes to the 401(k) deposit rules (generally 7 biz days). *I know that this has been debated here and elsewhere and it seems to be generally ok to decide, for a self-employed, as late as the due date of the tax return. But the spirit of the law, in my mind, says it should be decided by Dec 31 and we try for that.

I think it can be argued that you can't do it in a self-directed plan - that would be the "rule" that you are looking for. I'd see what the plan says, if anything, about holding funds before they can be allocated to participant accounts. If you're going to do it anyway, then I'd use a cash equivalent of some kind. It's just not worth the headache of dealing with losses (personally I would take the approach that losses are losses (the pre-funded account is treated as a pooled account), and not made up with additional employer contributions, but then you're back to the issue of whether this can be done at all in a self-directed plan). And not worth the headache of dealing with gains, either, which should be allocated on a pooled basis before being transferred to the self-directed accounts. True confession - we've done it, by sending money to a misnamed forfeiture account, and eventually transferring to self-directed accounts. Any gains were minimal and washed around somehow in the "forfeiture" account, eventually effectively taken as fees when the plan terminated. If the plan is pooled, then I don't see a problem, in practical terms.

Thanks, that might work

Sorry, I got the years mixed up and was thinking there was no problem with $22,500. Paul I's answer above recaps it nicely.

I think if the W-2 was "correct" (that is, limited deferrals to the max) you have a different problem (not an excess deferral, some kind of deposit error combined with a withholding error). It might possibly be returned to the employer as a mistake of fact but that is generally related to a wrong DOB or DOH or similar error; if there are company contributions to the plan I'd prefer to leave it in the plan and move it to an employer source, and then the employer and the employee can reconcile the issue outside of the plan. I'm confused by all of it. Are you thinking there was a total of $2000 overwithheld and deposited? $1000 "corrected" by 4/15?

I agree that this should be checked, but it really shouldn't be possible that the p/r provider could screw this up. I get that it was a mid-year change in providers, but unless something is really whacky, I doubt their system could exclude excess deferrals from taxable income on the W-2. And even if they did, I'm pretty sure it would (should) be picked up at the time of filing the 1040, so there really shouldn't be a need to file an amended return(s)...unless there were multiple screw-ups by multiple parties, which I guess is possible. There's a lesson in here about changing p/r providers mid-year. And there's the issue of this coming to light...now?

This is likely a whisper-down-the-lane kind of thing where someone did in fact do an in-service rollover, because they were 59 1/2 and the plan allowed it, and someone else missed that subtle (hah) nuance and then repeated it to someone else who took it a step further and now it is a "fact." (Profit sharing money can be distributed earlier, if the plan allows it, which would be rare. I'm pretty sure that's not what this is about.)

A shot in the dark here, but does anyone know of a good contact number for TD Ameritrade to get statements? We have a takeover plan with 30+ individual accounts that is being (has been) converted to a platform. We managed, with great difficulty, getting about 20 of the accounts transferred over, and we have access to the TDA website for account activity. Somewhat unbelievably, at least to my way of thinking, anyone who was paid out immediately drops off of their website, so we have no activity information on those accounts. (All we are trying to do is get statements; the money is gone.) Unfortunately, this part of TDA's business was sold to Schwab, and they are pointing fingers at one another as to who has this info. The TDA area I've been talking to is really for transferring money in or out, but the client services number they give me is for Schwab, and they insist that they don't have info on accounts that weren't transferred, which I believe. The broker is of no help at all; not only do they have the same problem with the accounts disappearing, but we took "their" money so they are refusing further assistance (and in general are worse than useless anyway but that is a given). So...any ideas for getting info on TDA "legacy" accounts?

HCEs can be excluded from SH. That's probably not the case, if it was included as a receivable by the prior TPA. My conspiracy theory mind says this change of TPAs might have been triggered by the client not wanting to make the contribution, and thinking that it would just go away if they didn't have to deal with the prior TPA any more.

All good. (But often f...ouled up.)

Re-thinking it, I believe you are right. I know this happened once "in real life" and I am confident we handled it correctly. I'd have to go back and look, or else experience it again, to be sure. I hope not to re-experience it.

Paul I, thanks for that excellent and detailed analysis. I believe that in a "pooled" situation, or as you say a loan being a general asset of the plan, it is best (required?) that the loan effectively becomes an earmarked asset (i.e. self-directed) when it is deemed. Then, at the later time of offset, the interest just washes away along with the loan. If it is maintained as a general asset of the plan, the written-off interest would be a loss to all of the participants (it was phantom interest at the time it was accrued so it all nets out on a global basis, but different participants who come and go will be affected differently). If the participant does make payments...ugh. I think there is something wrong with all of us who seem to enjoy this discussion!

Mmmm. Equally unresearched, I reach the opposite conclusion. One reason is that I don't want to have to keep track of it, another is that this interest is coming from outside the plan, paid by the participant, whereas earnings on voluntary contributions are earned within the plan. Treating the interest as pre-tax makes it effectively deferrals. I see regular loan interest payments differently but don't ask me to explain it.